Stocks Close Flat After Erasing Sharp Losses

Stocks cut most of their earlier losses, but still finished in negative territory Monday as ongoing worries over the euro zone debt crisis kept investors from fully jumping in.

The Dow Jones Industrial Average shaved most of its losses but still finished lower by 6.74 points, or 0.05 percent, to end at 12,653.72.

BofA and P&G led the blue-chip decliners, while Microsoft and Verizon climbed.

The S&P 500 fell 3.32 points, or 0.25 percent, to finish at 1,313.01. And the Nasdaq slid 4.61 points, or 0.16 percent, to close at 2,811.94.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended above 19.

Most S&P sectors closed in negative territory, led by financials, while techs turned higher.

“There’s not a lot of news to really push stocks either way today,” said Michael Sheldon, chief market strategist at RDM Financial Group. “The market does look like it’s ripe for some consolidation and at these levels, investors are nervous about chasing the market higher considering we’re not far from 52-week highs.”

EU leaders met in Brusselsto sign off on a permanent rescue fund for the euro zone. Greek Prime Minister Lucas Papademos will be among them as negotiators in Greece race to secure a debt swap deal.

A FT report said that Greece had angrily rejected a German proposalto create a European budget “overseer” to monitor the country’s finances in return for a second bailout, further adding to investors’ anxiety on Monday.

A glimpse of hope for the debt-stricken region came in the form of a positive debt auction for Italy, which saw its borrowing costs for long-term debt fall sharply.

“If they can work out a situation to ring-fence some other countries in Europe and help stabilize Greece, that will take a big downside risk off the table,” said Sheldon. “But until that happens, investors are going to be pins and needles day-to-day and week-to-week.”

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Financials were under pressure amid the ongoing uncertainty in the euro zone and following a handful of ratings changes from Goldman Sachs.

Goldman Sachs upgraded Citigroup to "buy" from "neutral," citing a clearer path for the bank to return capital to shareholders. Meanwhile, the brokerage downgraded Bank of America to "neural" from "buy," saying it anticipates higher execution risk for the firm over the next 12-18 months.

Citigroup chairman Richard Parsons is considering leaving the position to pursue other interests, according to reports.

On the M&A front, U.S. Airways jumped after a report that Delta Airlines may be considering a takeover bid. Delta is also said to be considering a similar move for recently bankrupt American Airlines parent AMR.

Swiss engineering group ABB announced it will acquire U.S.-based electrical components maker Thomas & Betts for $3.9 billion in cash, or $72 per share.

Pep Boys surged more than 20 percent after the autoparts retailer said it will be acquired by private equity firm Gores Group for about $791 million in cash.

Meanwhile, the FDA approved the diabetes drug Bydureon, developed by a partnership between Amylin and Alkermes .

On the economic front, consumer spending was unchangedin December, while spending was the weakest since June, according to the Commerce Department, as households boosted their savings. Economists polled by Reuters expected spending to gain 0.1 percent.

“Today’s personal income data points to relatively soft consumer spending in the economy over the next several months,” said RDM’s Sheldon. “Retail spending increased modestly in 2011, but consumer spending is likely to be tempered this year.”

While there are no major earnings reports today, ExxonMobil , Pfizer and Eli Lilly are slated to post results Tuesday morning. And Amazon.com is scheduled to report after-the-bell Tuesday.